By Terry Baucher*
When I consider what’s likely to have the most impact in tax this year, I keep coming back to the massive shift in attitude by tax authorities in the aftermath of the Global Financial Crisis (GFC).
Usually changes in the tax world are incremental, but what is going on now in the field of international tax is fascinating because of its scope and speed. It is one of those rare generational shifts, the implications of which will be felt for decades.
In April 2009 in the wake of the GFC, members of the G20 and the Organisation of Economic Co-operation and Development (the OECD) decided to clamp down on tax havens. Forty-two tax havens were identified as not complying with tax information exchange requirements. They were threatened with economic sanctions unless each tax haven agreed to implement a minimum of 12 Tax Information Exchange Agreements (TIEAs).
The tax havens rolled over within five days and hundreds of TIEAs have subsequently been signed. For example, New Zealand signed its first TIEA with a tax haven in March 2007; as of November 2014 it has signed TIEAs with 21 tax havens.
The most extreme example of information exchange is the United States Foreign Account Tax Compliance Act (FATCA).
Under FATCA, financial institutions outside the United States are required to register and report to the US Internal Revenue Service (the IRS) details of financial accounts held by US citizens, tax residents, and many other entities including those controlled by US tax residents or US citizens. It is extraordinary in its reach, catching not just individuals but trusts and even in some cases solicitor’s trust accounts.
TIEAs are designed to assist tax authorities in tracking down tax evasion. The GFC and the need to raise revenue also prompted tax authorities to review the use of tax havens in tax planning. This resulted in the OECD’s Base Erosion and Profit Shifting (BEPS) project.
According to the OECD, BEPS is “looking at whether and why [Multinational enterprises'] taxable profits are being allocated to locations different from those where the actual business activity takes place.” Profit shifting or “transfer pricing” has long been scrutinised by revenue authorities but what marks BEPS out is that it involves a greater degree of international co-operation.
If you think BEPS and the other international tax initiatives are all a bit abstract and unlikely to affect the “ordinary” taxpayer, think again. A key part of the OECD initiatives is reviewing the tax impact of the digital economy, particularly in relation to cross-border sales of goods and services. Regardless of what is said about compliance costs, the writing is now on the wall for the exemption from GST for goods and services purchased online.
The direct effect of BEPS on consumers is perhaps several years away, but in the meantime Inland Revenue is making full use of the information becoming available from TIEAs and other sources such as leaks by insiders. You can be certain Inland Revenue has sent a few “Please explain” letters to those Kiwis identified in recent leaks as holding bank accounts with HSBC in Switzerland.
It’s how all this new information will be applied by tax authorities that should give everyone pause for thought, particularly when you consider what happened to Iceland during the GFC.
In October 2008 in the middle of the GFC, the British Government invoked special anti-terrorist legislation enacted after the 9/11 attacks to freeze the Icelandic bank Landsbanki's estimated £7bn of UK assets.
The British legislation authorised such action if "action to the detriment of the United Kingdom's economy (or part of it) has been or is likely to be taken by a person or persons". The freezing order effectively equated the monumental incompetence of the Icelandic banks - which nearly bankrupted Iceland - with the actions of Osama Bin Laden. Understandably, the Icelandic PM Geir Haarde was outraged by Britain’s move, describing it (with some understatement) as a “completely unfriendly act”. (Haarde resigned in February 2009 and was later indicted for negligence in office. He was found guilty of a minor offence but escaped without punishment).
The British action caused a stir at the time but the creative use of legislation in ways not originally intended is nothing unusual, particularly when a state’s finances are under pressure. We should therefore not assume that the New Zealand Government could not get similarly creative if required.
Last year at a special seminar on tax evasion, Inland Revenue officials raised the possibility of using anti-money laundering legislation to counter tax evasion. (One attraction of doing so is that institutions reporting suspicious transactions cannot advise the account holder that they have done so). Several in the audience questioned the idea.
Our objections were not based on legal issues, because, as Inland Revenue observed, tax evasion is money laundering in its simplest form, but one of perception. We suggested that the public views money laundering as something done by “serious” criminals involving drug trafficking, prostitution, people smuggling or terrorism. In other words, bad people doing bad things.
We argued that the public would not perceive tradesman accepting cash for a job and then not declaring the income as being the proper targets of anti-money laundering legislation. Our view was that using anti-money laundering provisions in such circumstances could be seen as overkill and possibly prove counter-productive.
We also raised the point that Inland Revenue’s existing powers should be sufficient. They certainly were when detecting Alex Swney’s tax evasion, which was identified after a routine cross-check of Heart of the City’s GST filings.
What all this illustrates is that everyone should be aware that following the GFC tax authorities are sharing unprecedented amounts of information very freely. TIEAs and other initiatives such as FATCA have boosted Inland Revenue’s already considerable powers of information gathering. Inland Revenue can now track vast numbers of transactions and quickly identify any “suspicious” transaction.
It’s a Brave New World of tax where Big Brother is watching and the net is closing in on tax evaders.